Wheat Plunging as Stockpiles Climb to 10-Year High: Commodities

Winter wheat stands in a field in Kirkland, Illinois, on July 14, 2011. Photographer: Daniel Acker/Bloomberg

Nov. 4 (Bloomberg) -- Wheat is heading for the biggest
slump in three years as the second-largest harvest on record
swells stockpiles, easing shortages that drove global food costs
to an all-time high.

Prices that plunged 21 percent to $6.24 a bushel this year
in Chicago will probably drop as low as $5.90 before the end of
December, according to the median estimate of nine analysts and
traders surveyed by Bloomberg. Supply in the 12 months ending
June 30 will expand 5 percent to 684 million metric tons,
boosting inventories to the highest in a decade, the London-based International Grains Council estimates.

Production is expanding after last year’s 47 percent price
rise led farmers to plant more grain, while Russia and Ukraine
recovered from drought that ruined crops. Cheaper wheat will
reduce strains caused by rising corn and rice prices and add to
pressure on United Nations-monitored food costs that have
declined 9 percent from a record in February.

“The wheat is looking beautiful, there’s so much of it,”
Bruce Ley, 45, said from his farm near the town of Mullewa in
Western Australia in a region known as the Wheatbelt. “I’m a
bit worried that the global wheat glut may reduce prices but
there’s nothing I can do about that. I’ve just got to harvest
the stuff and get it to market.”

Commodity Index

Wheat is heading for its biggest annual decline since 2008,
when the IGC says harvests reached a record, and is this year’s
third-worst performer in the Standard & Poor’s GSCI gauge of 24
commodities, followed by nickel and cotton. The index
gained 2.7 percent since Jan. 1, versus a 7.7 percent drop in
the MSCI All-Country World Index of equities and an 8.5 percent
return on Treasuries, Bank of America Corp. indexes show.

Harvests are rising in Canada, Russia, Kazakhstan and
Ukraine, among the worst hit by last year’s weather, according
to the IGC, which includes more than 50 nations. While demand
will expand 22 million tons, compared with 3 million tons a year
earlier, stockpiles will still grow to 202 million tons, the IGC
estimates. That’s 53 percent more than in 2007-2008, when prices
reached a record $13.495.

Wheat may rebound should livestock and poultry farmers use
more in feed as a substitute for higher-priced corn, according
to Rabobank International. Corn trades at a premium of about 19
cents a bushel, compared with an average discount of $1.83 in
the past five years, data compiled by Bloomberg show. While
China’s corn harvest may gain 6.7 percent to a record this year,
according to an SGS SA survey for Bloomberg yesterday, higher
demand may still boost Chicago futures, Newedge USA LLC said.

Futures Traders

The IGC anticipates a more than 9 percent gain in wheat-feed use to 124.2 million tons, the highest level in about 20
years. Rabobank says demand may reach 129.5 million tons.

Options and futures traders may be betting on a rally. The
most widely held option gives holders the right to buy wheat at
$8.50 by Nov. 25, a 34 percent increase from the closing price
in Chicago yesterday. Wheat for delivery in September 2012 is 14
percent more expensive than for December this year, according to
data from the Chicago Board of Trade.

A return of extreme weather may also curb supplies of other
grains, boosting demand for wheat. Floods in Thailand, the
world’s largest rice exporter, destroyed as much as 7 million
tons of unmilled grain, the government estimates. That equals
4.6 million tons of milled rice, 1 million more than the global
surplus expected by the U.S. Department of Agriculture.

Biggest Exporters

The La Nina weather pattern, a period of cooling equatorial
waters in the Pacific Ocean that can lower rainfall in South
America, may limit corn sowing, according to Luke Chandler, an
analyst at Rabobank in London. Argentina and Brazil represent 30
percent of all corn exports and typically plant in the final
four months of the year.

The projected decline in wheat prices would boost prospects
for U.S. farmers, the world’s biggest exporters, making them
more competitive with rivals in the Black Sea region. At $5.90
per bushel, a metric ton of U.S. wheat would cost about $217.
That compared with Ukrainian supply priced at $240.50 on Oct.
25, according to UkrAgroConsult, a Kiev-based research company.
Egypt, the largest wheat importer, bought 60,000 tons of
Ukrainian wheat at $247.92 per ton in a tender on Nov. 1.

Russia lifted an almost yearlong ban on grain shipments in
July and Ukraine eased export quotas imposed to ensure domestic
supply after last year’s droughts. Russian sales will expand
more than fourfold and Ukraine’s will almost double, while U.S.
exports will slump 24 percent, the most in more than two
decades,
the USDA forecasts. The department is scheduled to release new
predictions Nov. 9.

Government Forecasts

“At those levels, the U.S. wheat will certainly become
competitive,” said Simon Clancy, the director of brokering at
Advance Trading Australasia Pty Ltd., which specializes in
agriculture. “The Black Sea can only ship so much, and I don’t
think it can become much cheaper than that. We will again see
buying interest for Chicago wheat.”

Better-than-expected U.S. shipments would help sustain
income for farmers, which the government forecasts will rise 31
percent to a record $103.6 billion this year. North Dakota, the
biggest wheat grower in 2010, has the nation’s lowest jobless
rate, at 3.5 percent.

Cheaper wheat may help food companies’ margins. B&G Foods
Inc., the maker of Cream of Wheat cereal, lists wheat as one of
the areas with the largest cost increases, President and Chief
Executive Officer David Wenner said on a conference call Oct.
25. The Parsippany, New Jersey-based company will report net
income of $48.4 million this year, compared with $32.4 million
in 2010, the mean of three analyst estimates compiled by
Bloomberg show. Shares of B&G Foods rose 58 percent since the
start of January.

Expanding global supply should ensure food companies don’t
have to contend with surging prices any time soon. The harvest
in Australia, set to be the second-biggest shipper, is estimated
at a near-record 26.2 million tons by the government. Exports
may climb to an all-time high of 20.4 million tons in the year
that started Oct. 1, according to the Canberra-based Australian
Bureau of Agricultural and Resource Economics and Sciences, a
state forecaster that traces its roots to 1945.

World production will climb 6 percent to 691 million tons,
boosting stockpiles, the UN’s Food & Agriculture Organization
said in a report yesterday.

“There’s a huge supply of wheat, far more than people had
anticipated a few months back,” said Abdolreza Abbassian, a
senior FAO economist in Rome. “The recovery in production has
been very, very good.”